The Magical Mystery Tour has come to Davis – a whirlwind of activity in city government as Mayor Don Saylor attempts to pack a full two-year Mayoral term into just six months before he departs the City of Davis for Yolo County.
The problem is that the biggest problem staring down the City of Davis – pension reform and employee compensations – have not been touched or even broached, other than a brief discussion when the council approved the police Memorandum of Understanding.
2010 is the year when the rest of the state woke up to the danger posed by escalating salaries combined with pensions. The reason I have long wanted to get out in front on this issue is that pensions are not a one-size-fits-all problem. There are different degrees of pension obligations and benefits.
It is one thing to cut the benefits for those getting 3% at 50, illustrating a wholly unsustainable practice of retiring people at the age of 50 and giving them 3 percent of their salary for each year worked. That public safety enhancement appears to be based on faulty assumptions about longevity and health of public safety officials, and our sense of remorse and obligation stemming from the tragedy at 9/11.
However, there is another class of people who make 2.5% at 55, and many of those people make $100,000, $200,000 or even more. Unions get blamed for pension problems, but many of the people making the highest pensions are non-unionized management.
There is also a class of employees we ought to seek to protect. These are hard-working people who make rather modest salaries, and have sacrificed earning power for security. They went into public service, retire at the age of 60 to 2% of their final salaries, and make a rather modest $27,000.
If the pension-hawks get their way, these people get thrown out with the dirty bath water that comes with executive salaries and public safety enhanced benefits, but they are not the problem and they are not the reason for our coming insolvency.
The problem, then, is easy to identify but difficult to address.
This week there have been two good articles on the public pension crisis. One of the tools that has been poised is a two-tiered pension system. But, as the Santa Rosa Press Democrat pointed out earlier this week, this plan will not resolve the financial burden in local governments.
The problem is simple, the Press Democrat reports, “Because the pension promises they made to most current employees cannot be broken, local government officials can reduce pension costs only by offering less generous retirement plans to new workers.”
However, as we know from Davis, most local governments are not hiring new workers.
This creates a problem, as “This means the savings potential from the creation of so-called ‘two-tiered’ pension systems that reduce benefits for new workers is of almost no help in the short term, when it’s most needed.”
Like Davis, the City of Santa Rosa is in trouble.
“The City of Santa Rosa, for example, has seen the unfunded liabilities for its three pension contracts soar 53 percent from 2004 to 2008, to nearly $60 million. To cover that gap, the city is facing $7 million in additional retirement costs over the next four years,” the Press Democrat reports.
As they point out, “The key shortcoming of one of the most widely discussed pension overhaul measures illustrates just how intractable the pension crisis facing local government is, and supports the notion that no single change can avert a financial wreck.”
Thus, a two-tiered system might be part of the solution, but it is not the solution.
As Dan Oney writes from the PublicCEO, a site that covers local government, “While I agree that the current problems will continue to plague government at every level due to promises made in the past, these problems will only become worse if steps are not taken to reduce the number of people who profit from such a broken system. Hence, a two-tier system is the first step.”
So if not two-tiered, then what? The Press Democrat suggests, “Instead, there is a growing consensus among pension experts that only a sustained campaign of numerous overhauls — at the state and local level, involving sacrifices of current employees, future workers and taxpayers — can bring the system back from the brink.”
The Press Democrat goes on to write, “Santa Rosa’s experience of trying to rein in its costs by implementing a two-tiered retirement system for its non-public-safety workers provides a glimpse of the difficulties in implementing local public pension reforms.”
They continue, “Three years ago, the city sought to establish a second, lower benefits package for new workers because, unlike private industry, courts have held that governments cannot change the retirement promises made to current vested employees.”
“This means that cities and counties cannot tinker with the formulas used to compute benefits for workers with more than five years in the system. They can’t increase the retirement age, reduce the percentage of salary used to base retirement benefit, or implement changes to prevent so-called pension spiking,” reports the Press Democrat.
“Those are vested benefits. If we changed them we’d get sued,” said Santa Rosa Human Resources Director Fran Elm. So, local officials focus on what they can change, namely the promises made to future employees. “It’s all about the second tier,” Elm said.
I even disagree with that. I am not even certain that it is part of the solution, because I believe a two-tiered system, which would have to be based on collective bargaining agreements, is fundamentally unsustainable.
At some point, the “new employees” will simply negotiate back up to where the old employees’ level of benefits currently sit. They will have to trade off a salary increase for it, but it will happen.
We see this intractability when the Press Democrat speaks to representatives from public safety.
Pension overhaul advocate Marcia Fritz says public workers must start contributing to their costs. “That’s a no-brainer. That’s outrageous,” Fritz said. “There is no excuse for them not picking up their fair share.”
But there is a differing view as to what constitutes a fair share. For instance, “Police and firefighters say they gave up raises and cost-of-living adjustments during the bargaining process in exchange for the pension status quo.”
Brad Conners from the Santa Rosa Police Officers Association said that “Now that those pensions costs are posing problems, public safety groups are willing to discuss changes.” The problem is, how? If these pension systems are negotiated and the two-tiered system is implemented, who is to say that in five years when this is off the radar, they don’t go right back to the same system?
And five years with limited turnover does not even buy us time to get out of the current predicament.
The problems are laid out in the LA Times on Monday.
The Times points out that scandals like Bell have been a mixed bag in terms of being an impetus for pension reform.
“The Bell scandal has been both a boon and a distraction to the campaign, pension-reform advocates say. Examples like Rizzo’s have helped attract public attention to pension problems, but they have also allowed lawmakers to focus on fixing rare, egregious problems rather than tackling issues that cost the pension system far more money, but also touch far more people,” the LA Times reported.
The time bomb is ticking in cities like Davis, which unfortunately is more representative of the rest of the state than we’d like to believe. Davis has benefited in the current economic crisis several-fold. First, it has better maintained its real estate values. And so while we have gone flat in revenue, we have not lost as much revenue as other cities.
Unemployment due to the reliance on the university and government jobs has been low, though the biggest impacts there may be yet to come.
Furthermore, while Davis has increased its salaries by large margins over the past decade, the base salaries are considerably lower than in other communities. We are not paying the city manager $200,000 or $300,000.
That is the good news and it has enabled us not to have repeating multimillion dollar deficits.
The bad news is that we have no way at this point to generate additional revenue. We have a fairly small sales tax base, heavily reliant on a struggling auto industry. We have added a Target that was projected to add $600,000 in sales tax revenue, but even if that pans out, that is a drop in the bucket compared to the millions in obligations that are coming due, perhaps by 2015.
That puts Davis in a precarious place and means that the problems faced do not appear to be as big as in other communities. However, we have less ability to extricate ourselves should disaster strike.
If we get hit by a $10 million price tag for pensions in 2015, where is the money coming from? We are not building our way out of it. We are not going to economically grow our way out of it.
That’s a nearly 20% hit on our general fund. How are we recovering from that?
Yes, if Davis goes down, many other cities will as well. That will be of small consolation and worse yet, the state will not have the resources to do anything to help places like Davis.
There are two solutions, none of them fun. First, there need to be real changes to the formulas and how the pensions are distributed. We need to increase retirement, protect against spiking, and most importantly hold the line on salaries which form the base for the pensions to begin with.
The second solution is that we need to really hit this point home locally because the city is going to need all of the bargaining units to be on board to achieve what they need with reforms. Right now you have DCEA balking at the non-starter MOUs offered by the city in 09-10. That hardly scratches the surface and already DCEA is complaining, so wait until the real reform hits.
Part of the problem is that the employees do not believe this is a real crisis. They keep hearing council talk about Davis being well-managed, and in good shape. There needed to be a sell job that we really are in crisis, and unless that happens convincingly, there will be no buy-in from the bargaining units.
This is an urgent problem. It was certainly worthy of the time and energy spent on other issues in the last six months. We’ve spent weeks talking about $74,000 for Zipcar and not a word about the $10 million in pension obligations about to hit in just a few years.
—David M. Greenwald reporting
“We need to…hold the line on salaries which form the base for the pensions to begin with.”
I would prefer to see public agencies take a hint from the private sector, which did away with defined-benefit retirement plans decades ago, for the very reasons that have public agencies in crisis now.
Jim Frame: “I would prefer to see public agencies take a hint from the private sector, which did away with defined-benefit retirement plans decades ago, for the very reasons that have public agencies in crisis now.”
Could you explain a bit more please, for those of us who are not that familiar w private sector pension plans…
dmg: “Part of the problem is that the employees do not believe this is a real crisis. They keep hearing council talk about Davis being well-managed, and in good shape. There needed to be a sell job that we really are in crisis, and unless that happens convincingly there will be no buy-in from the bargaining units.”
And whose fault is this? We have had a City Council majority and City Management who have consistently refused to be honest with the public as to the true state of the city’s budget. Remember the creative bookkeeping that went on, where “unmet needs” were conveniently tucked away in a separate category outside the budget. Then the magic wand was waved, and the budget declared “balanced” when certain City Council members were up for re-election?
[quote]Could you explain a bit more please, for those of us who are not that familiar w private sector pension plans.[/quote]
I’m hardly an expert in retirement plans, but my understanding is that a defined-benefit (DB) plan guarantees an employee a certain benefit (e.g., 2.5% of an employee’s salary times the number of years served) upon retirement. This benefit is generally indexed for inflation. It requires the plan administrator to accurately forecast inflation, return on investment, mortality rates and other actuarial considerations far into the future in order to ensure that there will be adequate monies available to pay the benefits when they become due.
The forecasting part is one aspect that can cause DB plans to get into trouble, because events don’t always play out the way the actuaries predict. The other problem is actually setting aside the forecast reserves, since it’s very tempting to fund existing operations by effectively borrowing money from the pension reserve. The U.S. government is perhaps the worst offender in this regard, using Social Security funds to pay current expenses.
The private sector has mostly dumped DB plans in favor of defined-contribution (DC) plans. These make no guarantee of income upon retirement; they only guarantee the contribution amount. This places the burden of forecasting future needs on the employees, who must then negotiate with the employer to set the contribution rates at an adequate level and/or save on their own in order to meet their retirement goals. Common examples of DC plans are 401(k) and 403(b) plans. (An IRA can be viewed as a defined-contribution plan in which the owner sets the contribution level, subject to the legal maximum.) DC plans make it much harder for an employer to commit to excessive benefits that don’t show up on the books for years.
Jim has explained things pretty well.
The downside of defined contribution plans is that one does not know what pension one will received. A properly administered DB program makes sense, but our politicians (and to be fair also executives at General Motors and other companies) essentially used DB programs to put off wage cuts that needed to be made and the unions were also guilty here,
[quote]Simple Rule of Economics: If something cannot continue forever, it won’t. [/quote]
The current DB system is unsustainable; no ifs ands or buts.
At some point it will be overturned, but it won’t be easy and probably will involve a (bankruptcy type) court. I think the fairest solution would have to involve some means testing and capping high pensions–and that will likely be the most politically feasible. Reforming current pensions and contributions is a necessary start but not enough to get the job done, especially for many cities.
When it comes to wage/pension reform our City Council has never missed an opportunity to miss an opportunity. So it goes.
The company I worked for shed their defined pension obligations through bankruptcy court as they reorganized. Did they have to or was it an opportunity that I believe they couldn’t pass up? Either way my DB was insured so I’m now collecting on a good portion of what I was promised. They replaced their DB with company contributions to our 401K accounts.
[quote]And whose fault is this? We have had a City Council majority and City Management who have consistently refused to be honest with the public as to the true state of the city’s budget.[/quote]
The fault is the Council and City Management.
To Jim Frame: Excellent explanation. Thanks.
dmg: “The fault is the Council and City Management.”
We agree to agree!!! :-))
Dr. Wu: “The current DB system is unsustainable; no ifs ands or buts.”
Read this on the internet this morning, which will blow your mind:
“Could California’s Pension System Collapse?
Sam Shane Investigates
CBS13 has uncovered a number of cases where retired government workers in the state of California are receiving very hefty pension checks. How much money are we talking about? Some retired government workers are getting hundreds of thousands of dollars a year, it’s getting to the point where critics say California’s pension system could collapse.
Former Bell City Manager Robert Rizzo and former Vernon City Manager Bruce Malkenhorst are two of the most dramatic examples of public officials in California who have made millions of dollars each by taking money from taxpayers.
“This is a skunk that stunk up everybody,” says Joe Nation, Public Policy Practium at Stanford.
Rizzo was making nearly $800,000 a year. But, Rizzo is certainly not alone. Bruce Malkenhorst was making more than $800,000 a year as the city manager of Vernon, a city with fewer than one hundred residents.
“We’re wondering if there would be anybody here who could talk to us about Bruce Malkenhorst,” CBS13 reporter Sam Shane.
We went to Vernon to find out how a city with fewer than one hundred residents could pay a city manager more than$800,000. Willard Yamaguchi is the Vernon city clerk who met us in the lobby of the Vernon city hall.
“I’m just wondering in a town like Vernon, how a city like Vernon affords to pay a city manager $800,000 a year?” said Sam Shane
“I’m not aware of that,” said Yamaguchi.
.
“You weren’t aware of how much money he made?” asked Shane
“No,” Yamaguchi replied…”
“It quickly became clear that Yamaguchi was either playing dumb in front our camera or he really didn’t know some very basic information the city in which he’s the city clerk.
“How big is your city? How many residents here?” asked Shane
“Um, I don’t know,” said Yamaguchi.
“You don’t know how many residents are here?” Shane said.
“I think it’s under a hundred,” Yamaguchi replied.
It is under a hundred, and most of the residents of Vernon, and the most of the warehouses, and major industries in Vernon get their electricity from power plant owned by the city of Vernon.
“How much money does the power plant generate for your city every year?” asked Shane
“That I couldn’t tell you,” Yamaguchi said.
.
“Is there anybody here who knows the answers to these questions?” replied Shane.
“Probably is, I know the city administrator right now is not available,” said Yamaguchi.
“So nobody’s available who can answer these questions for us?” Shane said.
“That’s why I was asked to come down here,” said Yamaguchi “I run my office, we process, we get ready for the meetings, I’m not a numbers guy.”
What we do know is officials with the city of Vernon paid Bruce Malkenhorst an enormous amount of money to be their city manager.
“They paid him close to nine hundred thousand dollars a year and they knew it, they were happy to do it,” said Max Huntsman, L.A. County Deputy D.A…”
“Max Huntsman is a Los Angeles County Deputy District Attorney who began investigating Malkenhorst five years ago. So how did Bruce Malkenhorst make nearly nine hundred thousand dollars a year as a city manager of the smallest city in Southern California?
“When he was actually working in Vernon he held approximately six or seven jobs and each job had a full salary that would be the envy of most folks,” said Huntsman.
“He had six jobs?” asked Shane.
“Yeah, he was the city clerk, the city manager, and a bunch of other jobs I don’t remember the title of,” Huntsman said.
Malkenhorst is now retired, and now takes home a pension of more than five hundred-nine thousand dollars a year. He lives in this very comfortable home, in an upscale neighborhood in Huntington Beach. How does Malkenhorst justify taking half a million dollars a year in pension money?
We tracked him down recently at the Los Angeles county courthouse to ask him. Malkenhorst is awaiting trial on charges he spent taxpayer’s money on massages and golf outings and political contributions. Standing next to Malkehorst at this hearing was his attorney, Michael Artan. After the hearing, outside the courtroom in hallway where cameras are not allowed to record, we approached Malkenhorst and said we’re working on a story about pensions. Malkenhorst’s lawyer said, “I understand that, we have no comment.”
“There are a lot of cases around the state where you have the exorbitant salaries which lead to these very high pensions,” said Joe Nation, Stanford lecturer.
In California today more than 9000 retired government workers, members of CalPERS, take home more than one hundred thousand dollars a year in pension money. More than three thousand retired California educators are each paid more than one hundred grand a year in retirement. Government pensions in California are so out of control that, this year a study out of Stanford estimated that California’s top three pensions are five hundred billion dollars short of meeting future requirements. Essentially, it says they’re running out of money. Pat Macht, a spokesperson for CalPERS, says the Stanford study is flawed, she called it funny math…”
“
“Academics in their ivory towers are not the ones forced to make tough decisions,” said Macht.
Authors of the Stanford study say California’s pension problems are serious and deep.
“I think this is the most serious financial challenge the state faces,” says Nation.
And it’s not just the Stanford study. Recently a professor at Northwestern University projected that California’s pensions will run out of cash in 2026. In 2005, the CalPERS fund had $236 billion dollars. Today, after years of bad investments and a faltering stock market, the fund has shrunk to $217 billion
“Does CalPERS admit at least in the smallest degree that there are some problems that need to be addressed here?” asked Shane.
“I think we have been at the forefront of a lot of change,” says Macht.
In our interview, Pat Macht said there have been many changes at CalPERS, and she did not admit to any problems.
“We’re in good shape. CalPERS is in good shape. We’ve been in business for 78 years,” says Macht.
“Is CalPERS in good shape?” asked Shane.
No, no. I think CalPERS is kidding themselves,” says Marcia Fritz.
Marcia Fritz is with the California Foundation for Fiscal Responsibility.
“I think it’s as serious as a heart attack,” says Fritz.
Fritz is a self-described democrat with an eye for numbers; she’s an accountant.
The benefits we’ve promised simply can’t be paid, that’s all there is to it. We’ve got to change things,” says Fritz…”
“
Marcia Fritz is with the California Foundation for Fiscal Responsibility.
“I think it’s as serious as a heart attack,” says Fritz.
Fritz is a self-described democrat with an eye for numbers; she’s an accountant.
The benefits we’ve promised simply can’t be paid, that’s all there is to it. We’ve got to change things,” says Fritz.
She’s been warning for some time, that when it comes to California’s government pensions, the numbers do -not- add up.
“Do you think the pension system will collapse in California?” Shane asked.
“Yes, I think it’s gonna collapse,” replied Fritz.
If it does, it will collapse in large part under the weight of fat pension checks to retired government workers like Bruce Malkenhorst and hundreds like him. While CalPERS officials insist they’re in good shape, critics and outside researchers say unless there are big changes California’s government pensions are in big trouble.
(© MMX, CBS Broadcasting Inc. All Rights Reserved.)”
SORRY FOR THE LONG POST, BUT THIS ARTICLE WAS JUST TOO GOOD NOT TO PUT IT ON BLOG…ENJOY…
Interesting what facts were left out… Vernon is a city of about 5.2 square miles in size, with a city workforce of ~ 1,500…
http://www.cityofvernon.org/assets/docs/Vernon_Economic_Impact_Study_2008.pdf
Vernon is one of those weird cities, like City of Industry, that exists for industry and has nearly no actual population. A long and checkered history of corruption in the case of Vernon: http://en.wikipedia.org/wiki/Vernon,_California
Don… thanks for the second bit of reality… I’m still amazed that CH13 was so interested in making the salary/population connection that all the other “facts” were left out… still a scandal, but not quite the same thing as if Esparto was paying 500k to its City Manager (as if they had one)…
hpierce: “Don… thanks for the second bit of reality… I’m still amazed that CH13 was so interested in making the salary/population connection that all the other “facts” were left out… still a scandal, but not quite the same thing as if Esparto was paying 500k to its City Manager (as if they had one)…”
Yes, I think to say this was simply a scandal is putting it mildly. The guy was holding down what was it, 6 jobs all at the same time! And of course the local DA is charging this alleged crook w using public moneys to pay for personal perks. When you see what goes on in Bell and Vernon, it makes you wonder how many other cities in CA are overpaying their employees?
My mom was telling me that in her county in the state of MD, the taxpayers not only pay the county exec an enormous salary (forget exact dollar amt but I remember it was ridiculous), but $300,000 for a security detail and other such perks. The more I watch how gov’t spends taxpayers’ money, the more I am convinced too darn much of it is going for graft of this kind…
ERM… do you have an opinion of what you would think is a reasonable “ceiling” for a person who:
earned a BS in a technical area,
who possesses State issued “licenses” (Engineer, Attorney, etc),
has 25 years of experience, and,
who is very competent in their job,
should expect working for the City of Davis, given the economy and the fiscal situation the City currently faces?
50k? 70k? 90k? 110k? other?
hpierce: “ERM… do you have an opinion of what you would think is a reasonable “ceiling” for a person who:
earned a BS in a technical area,
who possesses State issued “licenses” (Engineer, Attorney, etc),
has 25 years of experience, and,
who is very competent in their job,
should expect working for the City of Davis, given the economy and the fiscal situation the City currently faces?”
Hmmmm, good question! What our city manager makes seems reasonable compared to other jurisdictions in CA, altho I personally think generally upper level management in gov’t make too much… It used to be if you worked for the gov’t, you got less pay but better job security. If you worked for private business, the trade-off was that your received more pay but less job security. Now it seems as if you work for the go’vt, you get more pay and more job security (until lately). I think the salaries of a lot of upper management in gov’t jobs is way out of whack for their level of expertise…
ERM… you didn’t even begin to answer my question…